Proving fraud in a bankruptcy

Bank of Montreal v Garasymovych, 2023 ONSC 3630
What is the test for a debt to survive bankruptcy?

Overview: This case considers what is required to establish that a debt arose as a result of a fraudulent misrepresentation, such that it survives bankruptcy.

The Defendant applied for credit with BMO and received both a Mastercard credit card and a personal line of credit. Both of those credit facilities went into default, and BMO commenced enforcement proceedings. BMO then sought judgment of over $50,000, as well as a declaration that the debts arose by way of fraudulent misrepresentations and under false pretences and, as such, survive bankruptcy pursuant to s. 178 of the Bankruptcy and Insolvency Act. Specifically, BMO pleaded that the Defendant misrepresented his employment and income in applications for the two credit facilities, and BMO relied on these misrepresentations and provided credit under false pretenses.

Under the BIA s. 178(2), a discharge from bankruptcy releases the bankrupt from all claims provable in bankruptcy. However, exceptions to that rule are found under s. 178(1), including debts or liabilities that arise from "fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity": s. 178(1)(d); or "false pretences or fraudulent misrepresentation": s. 178(1)(e). In the face of the consequences that arise from a BIA s. 178 order, courts should be circumspect in granting declarations that survive bankruptcy, particularly when based on unproven allegations of fraud or fraudulent misrepresentation. The nature of a judicial declaration requires more than a mere consent or admission.

The elements of civil fraud are: (1) a false representation by the defendant; (2) some level of knowledge of the falsehood of the representation on the part of the defendant (whether knowledge or recklessness); (3) the false representation caused the plaintiff to act; (4) the plaintiff's actions resulted in a loss.

BMO offered no evidence of the mode of the Defendant’s alleged fraudulent misrepresentation as to his income, whether written or oral. Lacking direct evidence, BMO relied on the information contained in its proprietary software for the proof of the facts alleged, i.e. as to the representations made by the Defendant when he applied for credit. BMO’s affiant did not say who recorded the information or what steps were taken to ensure that it was accurately recorded.

The Court found that these records were hearsay. Thus, indirectly, BMO sought to admit those records into evidence under the business records exception to the hearsay rule. The exception is not a backdoor route to hearsay or double hearsay recitations of conversations or correspondence offered for the truth of the facts alleged. The test for the admissibility of any BMO business record in was proof that it was made in the usual and ordinary course of business. No such evidence was offered here. BMO failed to prove the business records that it relied upon to prove the allegedly fraudulent representations of the Defendant.

Further, the Court found that, in the absence of any actual evidence regarding any dealings between the Defendant and the unknown bank employee, the facts alleged may as easily speak to negligent rather than fraudulent misrepresentation, if a misrepresentation was made. In addition, even if the BMO computer records were admissible, the Court had to consider whether they were so unambiguous as to meet the high test of proving fraud. BMO had to prove the defendant’s knowledge of the falsity of his alleged representations, but proffered no evidence of that knowledge. The personal opinion of BMO’s affiant was irrelevant in that regard, yet was the only evidence that BMO produced.

Accordingly, the Court granted BMO judgment on the amounts claimed but held that it failed to prove the elements necessary to obtain the declaration that the debts survived bankruptcy on account of having arisen through fraud.

Judge: Kurz J.

Counsel: Allyson Fox of Rubenstein, Siegel for BMO